November 12, 2010

ITS NOT AS IF THE CUTS GET TO MUSCLE ANY TIME SOON:

A Deficit of Nerve: Obama's commission has ideas that Republicans can use. (WSJ, 11/11/10)

The chairmen are on better ground arguing for fundamental tax reform that would swap lower rates for fewer loopholes and "tax expenditures." On the latter, the draft is right to put the mortgage interest deduction on the table, as taboo as that is in Washington. If we've learned anything from the last decade, it ought to be that our many housing subsidies have led to a misallocation of capital with few benefits. Canada has no such deduction but a higher rate of home ownership.

Ditto for the employer deduction for health insurance, which costs some $200 billion a year and has also distorted incentives by creating a system of third-party payments. Individuals who bear little responsibility for their health-care expenses have little incentive to reduce costs, much less lead a healthier life-style that would save money over time. Refocusing this tax benefit on the needy while encouraging wealthier consumers to economize would help health markets and the federal budget.

The chairmen also take aim at the corporate tax rate, proposing in one option a reduction to 26%. Everyone to the right of MoveOn.org knows that the 35% corporate tax rate is a disincentive to invest in America and has sent businesses pleading to Congress for this or that loophole. This is the second Obama-appointed outfit to recommend a cut in the corporate tax rate, following Paul Volcker's economic advisory group this year, and it ought to be one basis for bipartisan agreement.

The draft also proposes spending cuts, albeit far too timidly. Its discretionary spending proposals would take outlays down only to 2010 levels, though Republicans have already promised to take them back to 2008. We wonder if this is a bow to Democrats who think that spending at 25% of GDP should be the new normal.

Posted by Orrin Judd at November 12, 2010 6:58 AM
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